The Fat Tech Dragon

Executive Summary

The purpose of this report is to develop a baseline analysis of innovation in China by systematically examining national trends in China while placing the country in comparative perspective. The report presents data on innovation inputs, such as finance, as well as several types of innovation outputs, such as intellectual property and commercial performance. This study relies primarily on broad quantitative measures because they facilitate measuring trends over time and engaging in cross-national comparison. The numerical data are supplemented by interviews with business executives, industry analysts, investors, and government officials in the United States and in China.

Broadly speaking, whether one looks at China in isolation or puts the country in comparative perspective, China’s innovation performance has gradually improved over the last decade along a number of indicators, separating China from other major emerging economies. Yet China still has a substantial distance to travel before it approaches the level of innovation found in the world’s most advanced economies. Most importantly, the level of inputs China is mobilizing is not consistently and smoothly translating into successful technology innovation outputs. This low “metabolism” of inputs into successful high-tech advancement is why we characterize China as a “fat” high-tech dragon.

China is dedicating an unprecedented amount of funding to research and development (R&D). Old-school banks and new-school investment vehicles are all getting in on the action. No longer are funds just being tossed at large-scale white elephants. Commercial competitiveness is now a central part of the decision calculus. Although this is a definite improvement over the earlier financing system, China may have overcorrected. By avoiding spending on basic research and foundational technologies, income is being generated less as a result of novel technologies and more as a result of new applications or business models.

China’s embrace of intellectual property (IP) is highly positive when contrasted with the country’s original disdain for property rights of any sort and widespread violation of IP rights. However, the Chinese state is not entirely withdrawing, but is, in fact, strengthening its role in some regards. Moreover, China may now be a “large” IP country, but it is still a “weak” one. Whether one is discussing licensing and royalties, mergers and acquisitions, or dispute settlement, Chinese patents still have little commercial value.

China’s commercial success has outstripped its progress in technology innovation. Chinese companies are acquiring greater market share in high tech, particularly in the most commodified segments of sectors. The value-added contribution to manufacturing is growing in absolute terms, and domestic companies are contributing a growing share to China’s high-tech exports.

China’s high-tech drive may be characterized as “good-enough innovation.” From a negative perspective, China is investing a great deal of human capital and funding, but is still far from a leader in high tech. From a more positive perspective, China is achieving incremental progress by benefiting from its strong capacity in manufacturing, the accumulation and diffusion of tacit knowledge, and the opportunities provided by such a large market.

Regardless of the level of support they receive from their government, Chinese companies will face growing challenges in their interactions with multinational businesses and in overseas markets. Foreign governments and multinational businesses likewise need to decide how to strategically respond to China’s approach. They could take a firm stand in opposition, try to influence China’s approach at the margins, or go along with the strategy as best they can. In any case, if they are not careful, they could end up under the heavy foot of a fat tech dragon.